Time to avoid the high street in search for winners

Share Tips 2005: After beating the market last year we reveal our choices for another profitable 12 months
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The Independent Online

The Independent's share portfolio for 2004 has outpaced the wider market, despite having to absorb the disaster of Courts going bust.

The Independent's share portfolio for 2004 has outpaced the wider market, despite having to absorb the disaster of Courts going bust.

Our biggest success was Profile Therapeutics, the Bognor Regis-based distributor of inhalers and nebulisers, which was taken over by one of its suppliers with a £25m cash bid at a 64 per cent premium to its price at the start of the year. We had been excited by a new inhaler it had been developing, while Respironics, its acquirer, was looking for a way to cut out the middleman on its range of medical products.

We also picked a stock from the year's best performing sector, commercial property, where valuations have been buoyed by the planned introduction of a new tax-efficient investment trust structure for the industry and by institutional investment in commercial property. Our tip, Great Portland, has seen improved demand for its West End office space.

Speedy Hire, which lends tools to small businesses and larger construction companies, was a valuation play, pure and simple, and turned out to be another big banker for us. The market has woken up to its mix of strong cashflows and prudent expansion plans.

Numis, the mini investment bank, continued to bolster its deal-doing reputation in the City this year, pushing its shares up one-third. And there was a modest gain for Pipex Communications, an internet service provider which has won new customers for its broadband services and spent the year bedding down new acquisitions, including the web-hosting business Host Europe.

A renewed bout of nerves over the direction of the global economy put paid to Cookson, the engineering group. And we were disappointed by the extent of the problems uncovered by Justin King, the new chief executive of J Sainsbury, on whom we had pinned hopes for an early turnaround at the ailing grocer. The company's asset base has indeed put a floor under the shares (and prompted some admissions of possible bid interest), but it is a floor some distance below where we tipped the stock.

Yet there were successes snatched from the jaws of what had seemed a likely defeat. Smiths, the aircraft parts and medical devices conglomerate, ended up by more than a fifth, despite making two-thirds of its profits in the rapidly depreciating dollar. And shares in Business Post recovered after a nervous start to the year, ahead of its launch of a rival commercial postal service to the Royal Mail.

Unfortunately, the big fat zero we have had to put next to Courts has taken the shine off the portfolio. It was clear quite early in the year that the refinancing talks - which we had hoped would finally crystallise the value of its portfolio of overseas businesses - would be stymied by increasingly difficult trading in the core UK furniture business. Had this been a real investment portfolio, we would have cut our losses in May. Instead, we were locked in while the shares were suspended and the business put into administration, as angry customers besieged the UK stores and as, at the height of the fury, a security guard was hurled through a window.

Our experience with Courts has prompted us to revise the rules of the game to make it closer to the way our readers really ought to be investing. Our tips this year have been chosen in the expectation that they will perform positively over the year as a whole, but we are introducing a "stop-loss" strategy. If a share drops 20 per cent from its price today or from its peak during the year, we will cut it adrift and replace it with a new tip. There will be regular updates in the Investment Column, which runs Tuesday to Friday.

So what do we recommend this year? Given the likelihood of a shift from consumer-led to business investment-led economic growth, we have chosen to steer clear of companies largely dependent on discretionary consumer spending.

First up is the mighty GlaxoSmithKline, the UK's biggest drugmaker and a dismal performer over the past few years. In 2004, investors got used to the idea that drug prices in the US are headed inexorably lower and that regulators are going to be tougher than ever on drugs with worrying side-effects. This year, GSK ought to show that it has a strong pipeline of genuinely innovative drugs available for launch later this decade, and that it can come to terms with the new, lower-margin business environment.

The specialist drug maker Shire Pharmaceuticals has faced criticism over what some investors see as strategic inertia. It needs to buy in new drugs or whole companies to boost its growth prospects but, despite a £700m cash pile, it has failed to make a move in 2004. But there are already some promising new and soon-to-be-launched drugs in the Shire medicine chest and the cashflows from mature drugs are being undervalued by the market.

To cap our healthcare bias, we are also tipping Care UK, which runs nursing homes and offers home helps to local authorities, making it a beneficiary of the ageing population. It has also set up treatment centres which will conduct operations under contract with the National Health Service, and ought to win more business here this year.

Collins Stewart Tullett has weathered so many storms - the bear market without a profit warning; accusations of insider trading dismissed by the regulator; the split cap trusts scandal where it escaped with a modest fine - that it is worth betting it will continue to perform strongly. The acquisitions of Tullett and Prebon have bolstered its presence in the still under-developed derivatives broking market, and it remains one of the equity market's best practitioners of corporate broking.

BSS, a distributor of heating and plumbing equipment, is chosen as a value play, the prospects for 20 per cent annual growth not fully reflected in its shares. The group benefits from increased government spending on schools and hospitals, and local authority spending on refurbishing social housing, and has won a big contract at Heathrow airport's new Terminal 5.

Shares in Prudential still haven't recovered from the shock of its £1bn rights issue in the autumn, so it looks good value. We expect 2005 to be the year that people in the UK turn their thoughts to retirement saving and confidence in the life insurance industry begins to recover. The Pru also has a strong position in the long-term growth markets of Asia.

Business spending on IT is likely to continue its recovery this year, and we have chosen to play this phenomenon by tipping Harvey Nash, a personnel business supplying temporary and permanent IT staff. Half the business is in the UK, but it also has offices in Europe, where the recovery has until now been lagging. We are also tipping Morse, an IT services business which supplies, installs and integrates computer systems for businesses in the UK, France and Germany.

With the copper price climbing again, Antofagasta, the Chilean miner which went into the FTSE 100 last year, will benefit from the ongoing strength of demand for metals from industrialising China. There is also the chance of a takeover, now that Andronico Luksic, the 65 per cent shareholder, has stepped down as chairman.

And finally, our traditional wild card is Expomedia. It organises business conferences in the new European Union member countries and in Russia, and is unusual in the sector in that it plans to operate its own venues. It is loss-making at the moment, as it invests in expanding from one venue to eight, but has strong relationships with European publishers, including T&F Informa and Axel Springer.

Our tips for 2005

  • Antofagasta
  • BSS
  • Care UK
  • Collins Stewart Tullett
  • Expomedia
  • GlaxoSmithKline
  • Harvey Nash
  • Morse
  • Prudential
  • Shire Pharmaceuticals

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